This website requires a browser which supports HTML5.
Some elements of this site will not work correctly until you upgrade your browser.
Question
1
Define
allocative
efficiency.
Check
answer.
Allocative
efficiency
occurs
at
the
equilibrium
point
where
both
consumer
and
producer
surpluses
are
maximised
.
Next
Question.
Click
to
enlarge
image.
Click
and
hold
to
reduce.
Question
2
Using
the
diagram
below,
fully
explain
the
impact
of
an
increase
in
demand
for
figgs
due
to
the
discovery
of
health
benefits.
Check
answer.
An
increase
in
the
demand
for
figgs
due
to
health
benefits
means
the
demand
for
figgs
increases
from
D
to
D2.
At
the
old
equilibrium
price
of
$3
there
is
now
a
shortage
of
20
000
boxes
of
figgs.
Due
to
the
shortage
consumers
will
bid
the
price
up.
As
the
price
increases
the
quantity
demanded
will
decrease
from
50
000
boxes
to
40
000
boxes
because
consumers
can’t
afford
to
buy
as
many
and
other
similar
products
are
now
relatively
cheaper.
The
quantity
supplied
will
increase
from
30
000
to
40
000
because
producers
will
cover
their
extra
marginal
costs
of
production
make
more
revenue
and
profits.
The
market
will
go
to
the
new
equilibrium
price
of
$3.50
and
quantity
of
40
000
boxes.
Next
Question.
Previous
Question.
Click
to
enlarge
image.
Click
and
hold
to
reduce.
The
price
consumers
pay
before
the
tax
=
$2.80.
The
price
consumers
pay
after
the
tax
=
$3.00
Producers
receive
$2.60
after
the
tax.
The
per
unit
amount
of
the
tax
=
$0.40.
Government
revenue
from
the
tax
=
$8
000.
Loss
in
consumer
surplus
=
$0.20
x
20
000
+
½
0.20
x
10
000
=
5
000
Loss
in
producer
surplus
=
$0.20
x
20
000
+
½
0.20
x
10
000
=
5
000
Deadweight
Loss
=
½
0.40
x
10
000
=
2
000.
There
is
a
deadweight
loss
due
to
the
indirect
tax
because
the
gain
in
government
revenue
of
$8000
is
less
than
the
loss
in
producer
and
consumer
surpluses
of
$10
000
($5000
+
$5000)
so
there
is
a
loss
in
welfare
/
efficiency
to
society
caused
by
the
indirect
tax.
Question
3
Use
the
diagram
to
full
explain
the
impact
on
the
market
of
an
indirect
tax
on
Pinkbull.
Calculate,
price
before
tax,
price
consumers
pay
after
the
tax,
the
price
producers
receive
after
the
tax.
The
government
revenue
from
the
tax.
Loss
in
consumer
surplus
and
producer
surplus.
The
deadweight
loss.
Explain
why
there
is
a
deadweight
loss.
Check
answer.
Next
Question.
Previous
Question.
Click
to
enlarge
image.
Click
and
hold
to
reduce.
With
a
minimum
price
imposed
the
new
market
price
will
be
at
point
C
and
quantity
sold
at
point
E.
Consumer
surplus
before
the
minimum
price
was
the
area
AKF.
Consumer
surplus
after
the
minimum
price
is
the
area
ABC.
Producer
surplus
before
the
minimum
price
was
FGK.
Producer
surplus
after
the
minimum
price
is
BCGO
The
deadweight
loss
caused
by
the
minimum
price
is
the
area
BKO
The
gain
in
producer
surplus
of
BCFM
is
less
than
the
loss
in
consumer
surplus
of
BCKF
and
so
there
is
a
deadweight
loss
of
BKO
-
there
is
a
loss
in
welfare
/
efficiency
to
society
caused
by
the
minimum
price.
Question
4
Use
the
diagram
to
fully
explain
the
impact
of
a
minimum
price
on
the
market.
What
is
consumer
surplus
before
and
after
the
minimum
price.
What
producer
surplus
before
and
after
the
minimum
price.
What
is
the
deadweight
loss
caused
by
the
minimum
price.
Explain
why
there
is
a
deadweight
loss.
Check
answer.
Next
Question.
Previous
Question.
A
good
growing
season
for
oranges
will
cause
the
price
for
oranges
to
decrease.
Oranges
are
a
cost
of
production
for
orange
juice
and
so
the
cost
of
production
for
orange
juice
will
decrease.
This
will
cause
supply
for
orange
juice
to
increase
from
S
to
S2.
At
the
old
market
price
there
is
now
a
shortage
in
the
market.
Producers
will
reduce
to
the
price
to
sell
off
excess
stock
.
As
the
price
decreases
the
quantity
supplied
will
decrease
as
produce
don’t
cover
their
marginal
costs
of
production
and
make
less
revenue
and
profit.
The
quantity
demanded
will
increase
as
consumers
can
afford
to
buy
more
at
the
lower
price
and
it
is
now
relatively
cheaper
than
other
fruit
drinks.
The
market
will
go
to
the
new
equilibrium
price
of
$1.20
and
equilibrium
quantity
of
40
000
litres.
Question
5
Use
the
diagram
to
fully
explain
the
impact
of
an
increase
in
supply
due
to
a
good
growing
season
for
oranges
on
the
market
for
orange
juice.
Check
answer.
Next
Question.
Previous
Question.
Click
to
enlarge
image.
Click
and
hold
to
reduce.
Click
to
enlarge
image.
Click
and
hold
to
reduce.
A
quota
is
a
restriction
on
the
amount
that
can
be
sold.
After
the
quota
the
new
market
price
is
C
and
the
amount
sold
is
I.
Consumer
surplus
before
the
quota
is
ADE.
Consumer
surplus
after
the
quota
is
ABC
Producer
surplus
before
the
quota
is
DEH.
Producer
surplus
after
the
quota
is
CBFH.
The
deadweight
loss
caused
by
the
quota
is
BEF.
The
gain
in
producer
surplus
caused
by
the
quota
of
CDOB
is
less
than
the
loss
in
consumer
surplus
of
CBED
and
so
there
is
a
deadweight
loss
of
BEF
There
is
a
loss
in
welfare
/
efficiency
to
society
caused
by
the
quota.
Question
6
Use
the
diagram
to
fully
explain
the
impact
of
a
quota
on
the
market.
What
is
consumer
surplus
before
and
after
the
quota?.
What
producer
surplus
before
and
after
the
quota?
What
is
the
deadweight
loss
caused
by
the
quota?
Explain
why
there
is
a
deadweight
loss.
Check
answer.
Next
Question.
Previous
Question.
With
the
subsidy
supply
increases
from
S
to
S+subsidy.
The
price
consumers
pay
before
the
subsidy
was
=
$5.
The
price
consumers
pay
after
the
subsidy
is
=
$4.50.
The
price
producers
receive
after
the
subsidy
is
=
$5.50.
The
per
unit
amount
of
the
subsidy
=
$1.
Government
spending
on
the
subsidy
=
$1
x
40
000
=
$40000.
The
gain
in
consumer
surplus
from
the
subsidy
=
$0.5
x
30
000
+
½
$0.5
x
10
000
=
$17500
The
gain
in
producer
surplus
from
the
subsidy
is
=
$0.5
x
30
000
+
½
$0.5
x
10
000
=
$17500
The
deadweight
loss
from
the
subsidy
=
½
$1
x
10
000
=
$5000.
The
gain
in
producer
and
consumer
surpluses
from
the
subsidy
of
$
$35
000
is
less
than
the
total
government
spending
on
the
subsidy
of
$40
000
and
so
there
is
a
deadweight
loss
of
$5000
to
society
-
this
is
the
loss
in
welfare
/
efficiency
caused
by
the
subsidy.
Question
7
Use
the
diagram
to
full
explain
the
impact
on
the
market
of
a
subsidy
on
Manuka
honey.
Calculate,
price
before
the
subsidy,
price
consumers
pay
after
the
subsidy,
the
price
producers
receive
after
the
subsidy.
The
government
spending
on
the
subsidy.
Gain
in
consumer
surplus
and
producer
surplus.
The
deadweight
loss.
Explain
why
there
is
a
deadweight
loss.
Check
answer.
Previous
Question.
Click
to
enlarge
image.
Click
and
hold
to
reduce.